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Environmental Science and Pollution Research (2020) -09469-7RESEARCH ARTICLETesting pollution haven and pollution halo hypotheses for Turkey:a new perspectiveMehmet Mert 1 & Abdullah Emre Caglar 1Received: 4 March 2020 / Accepted: 26 May 2020 / Published online: 10 June 2020# Springer-Verlag GmbH Germany, part of Springer Nature 2020AbstractIn this study, we analyzed the asymmetric short- and long-run causal links between foreign direct investments and emissions inTurkey over the time period 1974–2018. Using hidden co-integration techniques, we defined and tested the asymmetric pollutionhaven and asymmetric pollution halo hypotheses. To evaluate the long-run asymmetric causal relationship, we estimated both thecrouching error correction model and vector error correction model. We performed a stepwise regression model to estimate thecrouching error correction model. The empirical results confirmed an asymmetric causal relationship between positive shocks offoreign direct investments and positive movements in emissions in the short run as well as an asymmetric causal link betweennegative and positive shocks of foreign direct investments and positive emissions in the long run. Furthermore, the results showedthat increases in foreign direct investments led to a decrease in the rate of emission growth in both the short and long run. Thisfinding supports the validity of the asymmetric pollution halo hypothesis in Turkey’s case. Policymakers should strengthen theirenvironmental protection laws to protect the quality of their environments as well as implement policies that encourage the use ofclean technology and tax incentives that increase foreign direct investment inflows.Keywords Asymmetric pollution haven hypothesis . Asymmetric pollution halo hypothesis . Short- and long-run asymmetriccausality . Hidden co-integration . Crouching error correction modelIntroductionEnvironmental degradation has undoubtedly proven to be oneof the most important problems humanity must face in thetwenty-first century. Anthropogenic greenhouse gases represent an important source of environmental degradation. Sincethe beginning of the Industrial Revolution in the eighteenthHighlights FDI inflows-emissions nexus is analyzed using a hidden cointegration approach. To estimate the crouching error correction model, stepwise regressionwas performed. We found evidence in favor of the asymmetric pollution halo hypothesis. We defined long-run asymmetric causalityResponsible Editor: Philippe Garrigues* Abdullah Emre Caglaraecaglar@akdeniz.edu.tr; emreacaglar@gmail.comMehmet Mertmmert@akdeniz.edu.tr1Akdeniz University, Antalya, Turkeycentury, fossil fuel usage has increased CO2 levels from about280 parts per million (ppm) in pre-industrial times to about387 ppm at the beginning of this century and further to400 ppm now, according to the National Oceanic andAtmospheric Administration (NOAA) Annual GreenhouseGas Index (Boden et al. 2009; Butler and Montzka 2019).Carbon emissions (CO2) are known to represent the most significant contributor to recent climate change (Cai et al. 2018).Global energy-related carbon emissions increased by 1.7% in2018, the highest growth rate since 2013 (IEA 2018). Why docountries not reduce CO2 emissions despite internationalagreements to do so such as the Kyoto Protocol and theParis Agreement? In other words, why have CO2 emissionsincreased recently? According to a study by the Center forGlobal Development, developing countries account for 63%of the current CO2 emissions (Center for Global Development2015). In addition, the Clean Development Mechanismestablished under the Kyoto Protocol does not require developing countries to curtail their emissions that result from tradeactivities, while industrialized countries must reduce theiremissions to a certain level to comply with the Protocol.This effect is confirmed in the United Nations Conference

32934on Trade and Development (UNCTAD) 2019 report, whichstated that “annual carbon emissions have accelerated in developing countries and have stabilized in developed countries” (UNCTAD 2019).The Kyoto Protocol drew attention to trade activities indeveloping countries, which view foreign direct investment(FDI) as an important strategy for economic growth. FDI inflows to the developing countries have increased, especially inthe last three decades, due to increased globalization and thefree movement of capital. Developing countries cannot allocate sufficient resources to investments that will contribute toeconomic development to achieve their growth targets.Therefore, FDI can provide some of the resources required.FDI can assist in a country’s development through technologytransfer, improved productivity, new management skills, andinfrastructure developments. Although FDI contributes toeconomic growth in the host country, it also raises controversyabout environmental quality. The environmental economicsliterature approaches this question through two opposing hypotheses. The first, the pollution haven hypothesis, states thatpollution-intensive production activities are directed from developed countries to those with more lax environmental regulations through FDI. Thus, developed economies reduce thecosts of adapting to environmental regulations and benefitfrom a cheap labor force. The other hypothesis, known asthe pollution halo hypothesis, claims that companies fromthe investing developed countries contribute to the hostcountry’s reduction of emissions because their productionstructure relies on green technology, unlike the host country’sexisting production.Since the second half of the twentieth century, developedcountries have imported many products from developingcountries and in this way exported their CO2 emissions tothe developing countries (Peters and Hertwich 2008).Developed economies ultimately seek to keep the global temperature rise below 2 C. Thus, the developed countries transferred 16 Gt CO2 emissions to the developing countries between 1990 and 2008 through international trade (Peters et al.2011). In Turkey, a developing country, both CO2 emissionsand FDI inflows increased during the same period (WorldBank 2019). The EY Attractiveness Survey Europe 2019named Turkey Europe’s 7th most popular international investment destination in 2018. FDI in Turkey increased 209 billiondollars, more than tenfold the original amount, between theyears 2003 and 2018 (Central Bank of the Republic of Turkey2019). BP (2019) confirms that Turkey emitted 209.9 milliontons of CO2 in 2003, which had increased to 389.9 milliontons by 2018. Turkey seems to be quite far from their emissiontargets in both the Kyoto Protocol and the Paris Agreement.Turkey’s capability to reduce their CO2 emissions will alsoplay an important role in their EU membership process. Thus,deeply investigating the effect of FDI on CO2 emissions isessential for Turkish policymakers. Therefore, we believe thatEnviron Sci Pollut Res (2020) 27:32933–32943use of advanced econometric techniques to investigate theeffect of FDI on CO2 emissions in Turkey not only assists inguiding Turkey’s environmental policy but also provides animportant contribution to the environmental economics literature as a whole.This study examines the asymmetric impact of FDI onTurkey’s CO2 emissions between the years 1974 and 2018.In this context, this study aims mainly to asymmetrically analyze the relationship between FDI and CO2 emissions in theshort as well as long run, as opposed to the existing literaturewhich examines these links symmetrically, as both FDI andCO2 can react differently to random shocks. For example, anegative shock in a host country may cause some companiesto believe that the situation is temporary, deciding to maintaintheir position and continue their investments in that country.However, some companies do not want to take the risks associated with the negative situation and may withdraw theirinvestments. Similarly, emissions can increase or decreasedue to shocks. For instance, while some countries choose torestrict emissions through protective policies, others avoidserious measures due to economic losses from negativeshocks. Therefore, analyzing each of these variables’ disparatereactions to positive versus negative shocks strengthens thevalidity of the research. In this context, our study distinguishesthe asymmetric effects of shocks on the short- and long-termrelationships between the variables.To the best of our knowledge, the pollution halo/havenhypotheses have only been tested symmetrically. However,negative and the positive shocks can affect pollution differently. With this in mind, we obtained the negative and the positive cumulative shocks of FDI and CO2 emissions for Turkey.After analyzing short-run asymmetric causality by using thenegative and positive cumulative shocks, we performed hidden co-integration techniques drawn from Granger and Yoon(2002), and Hatemi-J and Irandost (2012) to test the asymmetric pollution halo and haven hypotheses in Turkey. The hidden co-integration methodology allows researchers to evaluate relationships between the positive and negative cumulativeshocks of the series. The hidden co-integration procedure usesthe cumulative shocks of the variables to allow estimation oflong-run asymmetric relationships between the series. By estimating the crouching error correction model (CECM) afterperforming Granger and Yoon’s (2002) hidden co-integrationtest and the vector error correction model (VECM) afterperforming Hatemi-J and Irandost(2012) hidden cointegration test, we estimated the short-run relationships between the cumulative positive and negative shocks of the variables. Furthermore, we defined the long-run asymmetric causality between the variables based on the error correctionmodels.This study contributes to the literature in the followingways: firstly, by asymmetrically testing both the pollutionhalo and haven hypotheses. Secondly, it investigates the